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DTE Energy Company (DTE)Stock (Electric Utilities Industry, Energy Industry, Services Industry)
 DTE also has a number of business segments that are atypical for a utility; most notably, their coal transportation business is one of the three largest in the country by volume, and is becoming increasingly important thanks to a growing demand for coal. These unregulated businesses diversify DTE's income stream, though the company's complicated business model diverts resources from the company's core utilities business. But both DTE's utilities are located in areas of Michigan with stagnant population growth, so diversifying the business is the only way for DTE to grow revenues. [1] Utilities infrastructure is expensive to install, so DTE has a monopoly within its service regions; comparable utilities include AEP and FirstEnergy.
[edit] Business and FinancialsDTE's two primary subsidiaries are Detroit Edison and MichCon, both of which are regulated utilities. Detroit Edison is an electric utility that supplies power to 2.2 million customers in southeastern Michigan and made 26% of DTE's net income in 2007. [2] DTE owns and operates electric generation facilities, and 79% of the power they create uses coal as a fuel. In 2007 DTE generated 42,359 MWh from fossil fuel plants and 8,314 MWh from nuclear facilities with an average cost of generation of $15.83 / MWh. Purchasing power costs DTE and average of $62.40 / MWh. [3] MichCon is a natural gas utility serving 1.3 million customers in Michigan which made 6% of DTE's net income in 2007. MichCon keeps 7% of its operating revenue as net income. [4] Both of these businesses are regulated by the state government, with their rates determined by a certain allowed return on equity. This guarantees that DTE will be profitable, but since prices aren't set by the company, the company's operating margins are largely out of its control. DTE also operates a few unregulated business segments which allow it to earn income that is not completely dependent on legislation, most notably energy trading and coal and gas transportation. DTE's unregulated business units operate in a total of 29 states, and its coal transportation businesses (DTE Coal Services and DTE Rail services) operates in Colorado, Indiana, Michigan, Nebraska, and West Virginia. [5] DTE's coal transportation business is among the top three in the nation by transportation volume, moving 40 millions tons of coal in addition to the 21 million used by DTE and it made 4% of the company's net income in 2007. [6] DTE's Energy Services division, which acquires, builds and operates energy projects in North America, earned 2% of the company's net income in 2007. It operates in Alabama, California, Connecticut, Georgia, Illinoirs, Indiania, Kentucky, Louisiania, Maryland, Michigan, Mississippi, Nevada, New York, North Carolina, Ohio, Pennsylvania, Utah, Virginia and West Virginia. [7] The energy trading business, which sells energy and helps other companies with power needs, earned DTE 3% of its net income in 2007. the business operates in Georgia, Michigan, and Texas. [8]
[edit] Trends/ForcesDTE is primarily affected by the cost of fuel to produce electricity and the regulatory rate cases that determine their rates. However, additional factors such as the company's size and market position also contribute to its prospects for future growth. [edit] Price of Coal DTE generates 79% of its electricity from coal. [12] Rising coal prices in 2007, due to increased energy demand from emerging economies, has raised the cost of electricity production for DTE. [13] It has also become more expensive to obtain mining permits and recover coal deposits. Since DTE is a regulated utility, it will eventually recover all of these costs through a rate mechanism which lets the utilities price in the cost of fuel. However, these costs are subject to a government review before DTE's rates jump; additionally these rate mechanisms typically measure the cost of fuel over a long time span, such as a year, which makes utilities especially vulnerable in the short-term. These rate adjustments are not permanent; a rate case must be filed to change rates for the long term in a costly and time-consuming process. So even though DTE recoups the cost of fuel in the long-term, in the short-term rising input prices hurt its earnings. [edit] Regulatory Rate CasesTo permanently change its rates, a utility files a general rate case. Detroit Edison's last electricity rate case ended with an authorized return on equity (ROE) of 11% - a $78.8 million reduction in rates. Because of this, DTE needs its current request for an increase in rates (pending as of May 2008) to be resolved in its favor. DTE is requesting an ROE of 11.25%, which would be a $284 million increase. [14] DTE's primary argument for requesting this increase is that the Michigan power infrastructure needs considerable attention. With a higher rate of return, and therefore more free cash, DTE would be able to make these investments to build infrastructure. By investing in infrastructure, the value of the company's equity would increase, allowing DTE to make more cash with the same rate of return. [edit] Nuclear Generation and Economies of ScaleDTE currently has only one nuclear generation facility, Fermi 2. It's a Boiling Water Reactor (BWR) with 1,098 MW of output, and it is located 25 miles northeast of Toledo, OH. [15] DTE is not a major nuclear operator, but they have expressed interest in building a second reactor at this site. [16] This would be the first new reactor built in the US in nearly 20 years, though many other utilities are considering the possibility. These large plants are expensive initially but have low operating costs. They have also become more economically viable due to aggressive incentives from the Department of Energy (DOE) included in a bill called EPACT2005. The bill provides production tax credits for the first 6000MW of new nuclear built in the U.S. (most new plants would be around 2,000MW each, so the bill covers approximately 3 plants). The DOE has also included loan guarantees which would help the company finance up to 80% of the project's cost. The catch to all of this is that no one has built a reactor in the U.S. for decades. Although all of the designs for new plants are thought to be efficient, powerful, and safe, no one is certain exactly (within a few billion) what it will cost to build one. DTE currently only has one nuclear plant; most of the US's nuclear power stations are operated by a few large companies, such as FPL Group (FPL) , Exelon (EXC) , Entergy (ETR), and Dominion Resources. Since DTE only operates one facility, it is slightly disadvantaged in an industry where cost savings are generated through economies of scale. [edit] Population Trends in DetroitDTE is located in Michigan and serves only Michigan customers. This area of the country has seen population growth that lags the national average.[17] Detroit, the largest city in Michigan, once had a booming economy that provided thousands of jobs because of the auto industry. However, what was once a major asset to the city has turned sour as the industry's decline has left has left Detroit with job cuts and stagnant population growth. [18] Thus, DTE's customer base is shrinking while the population in other parts of the country expands, leaving the company to rely on regulators to increase its utilities revenues.  [edit] Operations in only one service territoryDTE sells electricity and gas in Michigan only. Since both of these products have prices that are determined by regulators, a large portion of their gross income is determined by the rate cases and the local (statewide) Public Service Commission (PSC) that set these prices. The PSCs for each state have reputations for the rates they approve relative to similar companies regulated by other commissions. Michigan's PSC is rated as average by SNL, an industry information company.[20] This means that this specific public service commission does not place DTE in a poor position, but the fact that they are dealing with only a regulatory authority means that having a positive or negative relationship with the regulator can factor into the rate increase the commission authorizes. [edit] DTE's Business DiversityUnlike most of its utility peers, DTE makes a significant portion of its net income from unregulated businesses. This allows the company to earn revenue that is not capped by regulators but simultaneously continue earning the steady income from the regulated utilities. One trend affecting DTE's unregulated businesses is the rising demand for coal, illustrated by the in the coal pricing section. Rising demand also means rising demand for coal transportation. DTE's coal transportation net income has increased over 25 fold since 2005, and continued demand growth will support this trend. [21] [edit] CompetitionDTE energy technically competes for customers with other utilities, but since the industry is heavily regulated and there are high infrastructure costs that pose barriers to entry, customers rarely have a choice in their power supplier. Utilities are at least partially regulated in most parts of the country because the infrastructure required to run a utility creates a barrier which prevents other companies from competing on price. Since this puts the utility in position to abuse its monopoly powers and over-charge customers, the utilities are regulated by state governments. Michigan implemented a deregulation plan in the late 1990's , but the failure of the plan has led to a consistent trend of re-regulation. DTE's main regional competitors are American Electric Power Company (AEP), FirstEnergy (FE), and CMS Energy (CMS). DTE is different from these companies as a utility because it operates in only one region. Even with limited geographic scope, the company has a diverse set of business segments that separate it from its peers. By having distinct revenue streams, the company can offset poor revenues from one business segment with revenues from other segments. Most of DTE's unregulated business segments operate outside the boundaries of the state, freeing them from the fluctuations of the local economy.
 DTE Energy Company2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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